Nomura Micro Science Co., Ltd. (TSE:6254) May Have Run Too Fast Too Soon With Recent 40% Price Plummet

Unfortunately for some shareholders, the Nomura Micro Science Co., Ltd. (TSE:6254) share price has dived 40% in the last thirty days, prolonging recent pain. Looking at the bigger picture, even after this poor month the stock is up 62% in the last year.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Nomura Micro Science's P/E ratio of 11.5x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Nomura Micro Science certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Nomura Micro Science

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How Is Nomura Micro Science's Growth Trending?

In order to justify its P/E ratio, Nomura Micro Science would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. The latest three year period has also seen an excellent 199% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 5.5% per annum as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 9.6% per annum growth forecast for the broader market.

In light of this, it's curious that Nomura Micro Science's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Nomura Micro Science's P/E

With its share price falling into a hole, the P/E for Nomura Micro Science looks quite average now. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Nomura Micro Science's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Nomura Micro Science (of which 2 can't be ignored!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com